Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

A non-New Zealander as Governor?

The Australian newspaper ran an article yesterday on the appointment of a new Governor to the Reserve Bank of Australia. Glenn Stevens’ term expires in September. As it now March, I was a little surprised to read that

A spokesman for current Treasurer Scott Morrison said ….that the specific process for choosing the new governor was still under consideration.

But perhaps that just reflects the overwhelming expectation that the highly-regarded Deputy Governor, Phil Lowe, will get the job.

The Reserve Bank of Australia has had a long history of Governors appointed from within – in its (fairly short) history, only one Governor was appointed from outside (Bernie Fraser who moved from being Secretary to the Treasury). But the article explored the possibility that the Treasurer could look outside the Bank, or even abroad, for a replacement for Stevens.

Even allowing for the recent appointment of an expatriate Australian banker as Secretary to the Treasury, it seems pretty unlikely that the Treasurer would do much more than take a cursory look at possible candidates other than Lowe. If the Reserve Bank of Australia has perhaps been inclined to be excessively upbeat in recent years, it is not obvious that the Bank’s conduct of affairs has been so egregiously wrong – or upsetting to the government – that it would make sense to reach beyond the pretty deep bench of senior officials that the RBA has maintained over the years.

As the article notes, the appointment of a foreigner to a role as central bank Governor is not unknown – Mark Carney at the Bank of England at present, and Stan Fischer at the Bank of Israel are two I can think of – but it isn’t at all common in stable and advanced countries. (New Zealand’s former Deputy Governor Peter Nicholl served as head as Bosnia’s central bank in the aftermath of the civil war in the 1990s).

When inflation targeting was young, and there was a strong belief that it would be easy to hold a Governor to account, there was a view in some circles that it might even be best to get a foreigner as Governor – after all, the world labout market was so much deeper than that here in New Zealand, and since it was all very technical and the target was well-specified, the only thing that really mattered was technical expertise (perhaps even more than good judgement).

But no one looks at it quite that way now. It is widely accepted that central banks excess a considerable degree of discretion. That is so whether they are inflation targeting, nominal GDP targeting, wage targeting – in fact, anything other than a fixed exchange rate, or Friedman’s fixed money base target rule. There is considerable discretion, limited effective accountability, and the discretion is in areas of activity that matter to many people (ie the entire economy and financial system). In that sort of climate it seems reasonable that people would prefer to be governed, or administered, by people from their own country. No matter how capable other candidates might be, we don’t consider allowing people from abroad to become MPs or Cabinet ministers – at least not until they have lived here for a few years and become citizens themselves. It isn’t that all New Zealanders, or all Australians or all Americans, share the same values or views, simply a slightly inchoate but deep-seated sense that we should govern ourselves. Part of it perhaps is that in any of those roles – senior political ones, or powerful independent bureaucrats – the ability to explain oneself to the citizenry is a key aspect of the job, and that involves the ability to draw on common reference points, shared experiences etc.

In the Reserve Bank of Australia case, one could mount an argument that these issues are less compelling. After all, the Governor is chief executive of the Bank and chair of the Board, but he doesn’t get to appoint the Board, and he isn’t a single decision-maker. Interest rate decisions – the main decisions the Reserve Bank of Australia makes – are made by an outside Board appointed by the elected government. Even the Deputy Governor is directly appointed by the Treasurer and sits, as of right, on the Board.

But what about New Zealand?

Here the formal process for appointing a Governor is laid out in the Act. The Reserve Bank Board nominates a candidate, whom the Minister of Finance can accept or reject. If the Minister rejects that nomination, the Board must come up with another one. The process can go as many rounds as it takes, but at no point can the Minister just impose his or her preferred candidate. Personally, I think that is a weakness of our system – it is unusual to give the Minister of Finance so little so in the appointment of such a powerful official. Ours is a system where, formally, all the powers vest in the Governor personally, so the Minister of Finance also has no say in the appointment of any of the other senior officials of the Bank.

And compared to most central banks, the Reserve Bank of New Zealand exercises a large amount of discretionary powers in a wide range of areas. In addition to monetary policy, the Governor has considerable autonomy in setting prudential regulatory policy (and the application of that policy), in foreign exchange rate intervention, in payment system operations, and in the physical currency. On each individual limb, other central banks can be found that do what our Reserve Bank does, but take as a whole it would be difficult to find any central bank which (a) covers so many functions, (b) has so many powers formally delegated to the Bank, and (c) where all those functions vest with a single individual, the Governor. It is a role at least as powerful as that of most Cabinet ministers – partly because of the actual powers the Governor wields, and partly because of how much more difficult it is to get rid of a person if they mess up (compare, say, Judith Collins and Nick Smith, as two senior ministers in the current government to have been dismissed when they erred).

As the Reserve Bank Board and the Minister approach the end of Graeme Wheeler’s term next September, there must be a temptation to consider overseas candidates. After all, the current deputy chief executive will be in his mid 60s, a similar age to Wheeler, and was passed over when he sought to become Governor last time. None of the other internal senior managers look like outstanding candidates – and it was 1982 when an internal candidate was last appointed Governor (itself a pretty internationally unusual statistic). Outside the Bank, the list of plausible contenders in New Zealand doesn’t seem overly deep either – and for almost all the names I’ve heard suggested I can think of material arguments against.

But I think it would still be a mistake to go global. Some aspects of the role could be done by any able person – revitalising, for example, the Bank’s research and analysis across the range of its policy functions. That is partly just about good second and third tier appointments, and partly about being a voracious customer for the insights that analysis throws up . But the role also needs someone who understand the New Zealand economy, the New Zealand system of governance, and someone who understands the New Zealand financial system. And it needs someone who is comfortable, and credible, in telling the Bank’s story – and sometimes it will be a controversial or difficult story – to New Zealand audiences. Plenty of people criticized Don Brash over the years, but few doubted that his heart was in this country, and that its best interests were his priority. In a small country, with a foreign-dominated financial sector, a very powerful central bank, and ongoing controversy about the role of monetary policy and New Zealand’s economic performance, it is hard to imagine any foreign appointee successfully filling the bill.

Of course, it might be a little easier if the governance of the Bank was reformed. For example, in a system in which the Governor was chief executive, but had no more voting rights on monetary policy or financial regulation policy matters than others members of the respective committees, the stakes are a little lower. But even then, I think such governance reform more appropriately opens the way to the appointment, from time to time, of a foreign expert as a member of one or other of the voting committees. Since the Bank of England’s nine-person Monetary Policy Committee was established by legislation almost 20 years ago it has not been uncommon to have a foreigner sitting on that committee. In a New Zealand context, supplementing local expertise with outside perspectives in that way could have some appeal – if New Zealand government board fees were sufficient to attract quality candidates – but we are still likely to be best, in all but the most exceptional circumstances, to look for a Governor from home – as we do when we choose ministers, judges, (and these days Governors-General), military chiefs and so on.

As I’ve noted before, the next gubernatorial appointment is in any case complicated by the timing of next year’s election. Graeme Wheeler’s term expires just beyond three years since the last election, and most of the opposition parties have been campaigning on changes to the monetary policy framework. If they are serious about reforms, they are also likely to revisit the governance arrangements, to shift towards a model that is (a) more internationally conventional, and (b) more in line with how we govern other independent government agencies in New Zealand. The current government would no doubt be within its legal rights to make an early appointment for the whole of a new five year term (having obtained a suitable recommendation from the Bank’s Board – all of whom have been appointed, or reappointed, by the current Governor). But given the timing it would seem an inappropriate use of power, that could materially complicate relations between the Bank and a future government. Somewhat reluctantly, I think Graeme Wheeler should be asked to stay on for an additional year or so, allowing whichever party forms the next government to appoint a Governor to work with whatever model of monetary policy and central bank governance emerges from the electoral process.

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6 thoughts on “A non-New Zealander as Governor?”

Maybe poach (super Mario!) Draghi? Poor chap always looks so shattered on the telly and he likes golf I hear: NZ has plenty of courses on offer which could be tempting? Or maybe Mervyn King given his new book, though, having recently been appointed to the Aston Villa Board he is likely wedded to the UK for now I guess. Are you going to throw your hat into the ring Michael?! Go on….!

Much as I’m looking forward to reading King’s book – and I loved his comment on Brexit and the elites (these business people are often the same people who thought we should join the euro, Why would we listen to them?) I think humility (at least ex post awareness of one’s mistakes) is a good quality, and when King came thru NZ a couple of years ago there was no willingness to acknowledge mistakes, not even ones that might only have become clear wih hindsight. He is a big cricket fan tho – his visit here nicely coincided with a Basin test match -, so perhaps he could be the summer Governor.

…haha – sounds very reminiscent of a King anchored panel discussion I was once privy to. Mind you, Bernanke said ‘sorry’ for Fed decisions made during the Great Depression in 2002: perhaps that set a benchmark….!!

….a good read: interesting thoughts on the exchange rate!! This bit caught the eye: “We formalised and revised the Official Cash Rate Advisory Group (OCRAG). We already had external people on it, but I required written advice from the members to be in the form of a “one pager” [with advice required under
structured headings] that would then go to the Board”. Has this ‘formalisation’ changed the internal decision making process at all? And are ‘external people’ allowed to be from overseas?

Re formalization, no it didn’t affect it much. Under Don Brash we each used to be able to write up to 2 pages, structured any way we liked. Alan preferred a tighter structure for the advice – which was a little constraining at times, but easier for him to absorb and process.

The externals could be from abroad, altho it hasn’t happened to date. I doubt it would be a very appealing role, as structured so far, since (a) the pay isn’t great, and (b) there is no formal vote, and (c) they tend mostly to be involved in the 4 MPS decisions a year, not the other ones.